Pages

One of the strongest storms to hit the U.S. since 1935 struck western U.S. territories Oct. 25, leaving more than 100 injured and one dead, according to KUAM News. Relief efforts continue, now with help from federal funds as a Major Disaster Declaration for Super Typhoon Yutu was confirmed Oct. 27. With such devastating damage, rebuilding efforts will include construction, which will likely trigger a larger customer base and much-needed attention in the Commonwealth of the Northern Mariana Islands and Guam where the storm hit hardest.

Yutu comes just a month after Typhoon Mangkhut, another serious storm that hit Guam and the Philippines. Recovery efforts for Yutu are expected to be slow predicted Brandon Aydlett, a meteorologist with the National Weather Service. Especially given the lack of Western media attention throughout the week of Oct. 25 and onward, construction efforts may be overlooked but are still necessary.

"This is the worst-case scenario. This is why the building codes in the Marianas are so tough," Aydlett said in a CBS News story. "This is going to be the storm which sets the scale for which future storms are compared."

When working with customers in U.S. territories, like U.S. states, all laws vary. Guam last updated its Mechanic’s Lien Law in 2009, repealing the 1962 law that was previously in place. To learn more about doing business in Guam and other U.S. territories during times of natural disasters, visit NACM’s Secured Transactions’ Lien Navigator.

After a string of solid results in NACM’s Credit Managers’ Index
(CMI) starting this past spring, the predictive index is at its worst
output since April. The October CMI reading dropped nearly two points to
54.5 from 56.4 in September.

“This is not an emergency
situation to be sure as these numbers are still solidly in the mid-50s,
but it isn’t the trend that had been hoped for at this point in the
year,” said NACM Economist Chris Kuehl, Ph.D.

Much of the
deterioration was found in the favorable factors, with sales declining
more than six points to its lowest level in 2018. Overall, the
favorables sank to 61.6.

Within the unfavorable factors,
bankruptcies slipped below a score of 53 for the first time since May
2017. The overall unfavorable index dipped into contraction territory
(score below 50) for the first time since April.

“This
was a fairly profound slide which comes at an awkward time. This is the
time of year services should be carrying the load, but it isn’t at the
moment, while manufacturing generally slides until the first of the
year,” concluded Kuehl.

The full October 2018 CMI report will be published Oct. 31 on NACM’s website.

The current debt levels of U.S. oilfield and drilling (OFS) companies
is unsustainable over the long term. According to Moody’s Investors
Service, OFS companies need a “substantial improvement in cash flow.”

"U.S.
oilfield services and drilling companies' high debt levels will
continue to constrain their credit quality in 2019 and beyond," said
Sreedhar Kona, a Moody's senior analyst. "The largest firms are
significantly better positioned to regain their credit strength next
year than the smaller ones, though the threat of balance sheet
restructuring will persist, particularly for the latter."

Smaller
and less diversified OFS companies face the most risk, while larger
firms such as Schlumberger and Halliburton stand to benefit the most
from an OFS recovery. Over the past 10 years OFS credit quality as a
sector weakened. The average debt to EBITDA ratio increased more than
4.5 times in 2017, states Moody’s.

“A decade ago,
earnings were growing more quickly than debt, but the reverse was true
between 2008 and 2014, then in 2015-16 cash flow shrank by more than
30%, with a consequent tripling in leverage,” concluded the release.

The Federation of Small Businesses (FSB) in the U.K. announced this week that larger firms that do not pay their suppliers on time should be stripped of government contracts. Late payments have caused nearly 50,000 companies annually to shut down, according to The Guardian. The firms owe tens of billions of pounds, and the closures of these companies have led to economic costs amounting to around 2.4 billion pounds.

Before U.K. giant Carillion went bankrupt, the company signed off on the Prompt Payment Code, which Carillion now stated does not have a real impact on the late payments landscape. FSB also said sanctions against larger firms should be enacted, including a ban from government businesses. Eighty-four percent of FSB member firms reported being paid late regularly, and at least one third of firms said that 25% of payments arrive later than the agreed upon terms.

“One member told me he was put on terms of 180 days. Our members are providing the working capital of big companies,” said FSB National Chairman Mike Cherry in a Financial Times report. Cherry also said despite the several government initiatives to solve late payments, late payments have only gotten worse.

The global equity market is reacting to geopolitical tensions as the price of copper fell amid the death of Saudi Arabian journalist Jamal Khashoggi and the slowing demand of copper in China, according to a recent article by Reuters. Benchmark copper fell a total of 0.7%, now costing a total of $6,196 per ton.

Today, Turkey’s president stated the death of Khashoggi was “savagely planned” by Saudi Arabia, likely in response to Khashoggi’s comments on the Saudi government and exercise of free speech through the press. With such political unrest between the two countries, the price of copper fell. “Metals are reacting to what is happening in equity markets right now,” said Capital Economics senior commodities economist Caroline Bain in the Reuters piece. As tensions escalate, the market will continue to react.

China has also contributed to the decline in the metals market. The country experienced the slowest growth in the third quarter since the global financial crisis. Chinese officials did announce an expansion of targeted measures that will calm financing issues following this drop in the third quarter; however, investors are not convinced such a plan will actually work.

Sears Holdings Corp. Chairman Eddie Lampert is in the process of
finding a financing partner for the company's bankruptcy filing.
According to Reuters, Lampert's private equity firm, ESL Investments,
has talked with investment firm, Cyrus Capital Partners LP, about
sharing the financial burden of a $300 million loan.

Meanwhile,
some of Sears' vendors have distanced themselves, states Bloomberg.
Vendors have also stopped shipments to Sears, which became the latest
former brick-and-mortar retail giant to file for Chapter 11 bankruptcy
earlier this month.

Some suppliers are asking for better payment
terms including advanced payments, but Sears is looking for terms that
will be more in their favor, according to Bloomberg.

Just one day
after Sears' bankruptcy filing, swimwear vendor In Gear Fashions filed a
lawsuit in Cook County Circuit Court against Sears, Lampert, ESL and
Sears' subsidiary Kmart, according to the Chicago Sun Times.
The swim vendor claims Sears owes them nearly $840,000 and is in breach
of contract. In Gear Fashions states payments stopped Oct. 12 despite
more than $182,000 being owed over four installments between Sept. and
Oct. 25.

Sears has not turned a profit since 2011; however, in a
company blog updated in June 2017, Lampert said, "Across our entire
vendor base, we have always met our payment obligations and are
confident that the steps we are taking to improve our financial strength
and reduce our operating losses will ensure that we will continue to be
a strong business partner for many years to come."

The post was in reference to the annual stockholders meeting and an issue with power tool manufacturer One World.

Sales continue to fall for previously owned homes in the U.S., and September showed the sixth-straight monthly drop in sales, according to Bloomberg. Sales of these homes have fallen to the lowest level since 2015, and this consistent drop is the longest since 2014.

Despite a lack of desire for purchasing older homes, U.S. housing starts also fell in September, with the major declines coming from the Southern U.S.—specifically in the path of Hurricane Florence. The declines in both housing starts and sales for existing homes may only be temporary, but with the mortgage rates continuing to increase, housing may become too expensive to keep up the demand for building.

September also marks the fifth month of prices rising less than 5% year over year. With mortgage rates climbing and continuing dips in sales and construction, the demand for housing may continue to fall looking ahead. Since hurricane season will be ending in November, the housing starts may decrease until close to the end of 2018.

After filing for bankruptcy in June, Toys ’R’ Us announced its doors may be reopening—still without promise to pay its former employees and the small promise of paying a mere 22 cents on the dollar it owed creditors after the company filed for bankruptcy. Lenders plan to sell the intellectual property of Toys ’R’ Us instead of continuing with a bankruptcy auction, which lenders are hoping will lead to a reboot of the chain.

According to National Real Estate Investor, Toys ’R’ Us lenders plan to open stores globally, and they are working with potential partners to fund the projects as they develop new ways to rebrand one of the most iconic children’s stores.

But with creditors already receiving so little back from the company and with about 30,000 employees still without their promised severance packages, Toys ’R’ Us’ comeback may not prove to be fruitful. Before filing for bankruptcy, Toys ‘R’ Us was more than $5 billion in debt. It’s unclear whether a rebrand can save the company once more, but credit managers should continue to remain cautious on whether to extend credit to the future Toys ’R’ Us.

The International Monetary Fund (IMF) and the World Bank are gathering this week to discuss the state of the global financial system, which has many worried because of emerging markets and heightened trade tensions. The meetings are held in Bali and include a review of current risks to the world’s financial well-being.

On Oct. 10, Reuters reported “easy financial conditions,” such as high debt levels and “stretched” asset valuations, are fueling economists’ concerns, following IMF’s report that tightening financial conditions have caused near-term risks to increase. While economies may not feel pressure at the moment, IMF capital markets director Tobias Adrian said in the article that high inflation could cause interest rates to skyrocket when least expected.

“In the report, the IMF said economic growth appears to have peaked in some major economies while the gap between advanced countries and emerging markets was widening,” Reuters states. “The IMF on [Oct. 9] cut its global growth forecasts due to an escalating U.S.-China trade war and growing financial strains on emerging markets.”

Economic conditions in the U.S. are holding strong, despite an interest rate increase by the Federal Reserve in September and another expected to follow in December. Meanwhile, slow conditions are seen in the euro area and Japan, Reuters noted, with moderate conditions in China—a status that could change depending on the country’s trade dispute with the U.S. The IMF recommends global regulators “keep in place measures” enacted during the financial crisis a decade ago as a precaution.

September was good to the U.S. service sector, where activity reached a two-decade high as the economy begins the fourth quarter. The Institute for Supply Management’s (ISM) non-manufacturing activity index indicated more hiring was behind last month’s results that were last seen in August 1997.

Following Federal Reserve Chairman Jerome Powell’s remarks earlier this week that the economic outlook is “remarkably positive” as well as last week’s interest rate hike, Reuters reported economists anticipate yet another rate increase in December, the fourth hike in 2018. Economists said in the Oct. 3 article they anticipate ongoing growth; however, there are still concerns among companies in the service sector, including “capacity, logistics and the uncertainty with global trade.”

“Industries are bumping against capacity constraints in a robust economy and tightening labor market conditions,” Reuters states. “Companies are increasingly reporting difficulties finding qualified workers to meet demand, leading to delays in delivering goods and services.”

The ISM findings are complementary with NACM’s Credit Managers’ Index (CMI) September report, showing an overall boost in favorables such as sales and dollar collections. September typically has “quite a lot of activity in the service sector,” said NACM Economist Chris Kuehl, Ph.D., who noted that retail usually thrives the most, while construction dwindles in the colder months. According to CMI reports since 2015, the service sector experienced growth three out of five times during September.

“The movement is subtle to be sure, but at least it is heading in the right direction, and for two
months in a row,” Kuehl said in his comparison between the September 2018 and September 2017 CMI reports. “Dare we hope for a longer trend?”

The holiday shopping season is approaching quickly as shoppers will soon begin flocking to department stores and small businesses in the coming months. A busy shopping season calls for more retail hiring; however, CNBC reports not all retailers will successfully fill their vacant positions. Demands for higher wages lure some employees away from low-paying jobs, while those who remain are left to pick up the slack.

On Oct. 1, the news outlet shared findings from global consulting group Korn Ferry that first looked back to the 2017 holiday season when 23% of retailers were unable to reach their desired number of temporary hires—expectations that will likely worsen this year. While nearly 70% of the participating 20 major U.S. retailers want to hire similar employee numbers, CNBC states, just over 60% are instead giving permanent employees more hours to close the gap.

“There are more jobs out there than there are people looking for them. ... It's a hustle to find the talent,” Korn Ferry Senior Partner Craig Rowley said in the article. “Retailers are asking their existing employees if they can work more because they're already trained. This year more than ever we're seeing employers getting workers to work more hours.”

Rowley also told CNBC that hiring is the main speed bump for the 2018 shopping season, sales being troubling last year.

About NACM

As the advocate for business credit and financial management professionals NACM and its network of Partners take great pride in being the primary learning, knowledge, networking and information resource for commercial creditors nationwide. NACM membership begins with a local NACM partner. Join our network today!